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Welcome to the bottom of the interest rate cycle – we hope

Esteemed colleague Peter Martin read Philip Lowe’s first speech as Reserve Bank governor and thought he held out hope for more interest rate cuts. I read the same speech and thought Lowe held out hope for no more interest rate cuts. Such is life in the industry of RBA watching – something for everyone. Video duration03:04Replay Video IconPlayer help iconVideo duration03:04Video duration01:55Video duration03:37Video duration00:31Video duration05:34Video duration05:34Video duration02:38More videosHear what the Reserve Bank has to say about inflation, jobs and housing in Philip Lowe’s first speech as RBA governor.You should of course read the full speech yourself, but as you probably think life is too short, here’s my translation: low inflation is a worry and the RBA takes it very seriously, but there are some encouraging signs that the economy is starting to pick up and will pick up more over the next couple of years. Specifically, Lowe said “our central forecast remains that inflation in Australia will gradually pick up over the next couple of years, although it is still likely to be closer to 2 per cent than 3 per cent”. RBA boss Philip Lowe thinks there’s been little change in our overall labour market underutilisation. Photo: BloombergWith interest rates already “very low”, that’s why the RBA left rates steady at the last board meeting. If you think we’re on the right track with the cash rate at 1.5 per cent, you’d need a good reason to cut it further. Lowe reinforced that the RBA does indeed aim to have inflation – and the public’s expectations of inflation – average two to three per cent over time. However, he pointed out the mathematically obvious that it can do that by being both above and below the target zone for considerable periods. Combined with his House of Representatives economics committee chat, it seems the governor is not panicking about the present sub-target rate as long as he thinks we are heading in the right direction. And he stressed the RBA wants to achieve the target in a way that best serves the public interest, balancing the needs of the labour market on one hand with the danger of people and businesses getting into too much debt on the other. “Achieving the quickest return of inflation back to 2.5 per cent would be unlikely to be in the public interest if it came at the cost of a weakening of balance sheets and an unsustainable build-up of leverage in response to historically low interest rates,” he said. “Conversely, the case for moving more quickly would be strengthened in a world where the labour market was deteriorating and people were having increasing difficulty finding jobs.”Scott Morrison has enough problems without looking silly by being wrong-footed by the RBA. Photo: BloombergAn unsustainable build-up of leverage is not on, but neither is a rising unemployment rate. So, going into next week’s September quarter inflation figures, how’s the balancing act?Despite the unemployment rate falling, Lowe thinks there’s been little change in our overall labour market underutilisation thanks to worsening underemployment. (It’s something of a footnote about our society that the RBA believes “full…